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Roles and responsibilities of the Inventory Manager Warehouse and inventory operations Inventory valuation How much to order? Economic order quantity Managing and forecasting inventory Inventory Planning Warehouse planning and systems Specialized training in Materials Management
Inventory Management
Efficient inventory management is important to a company because of its position in the working capital cycle... Cash
received
Debtors or receivables
Distribution & retail Inventories of finished goods Other production resources Work-in-process inventories
Purchase orders
RIP
Money tied up in inventory is costly dead money. It cannot be used for other more productive purposes... but the need to hold inventory is often unavoidable! ITC
M11:U1:1.2-1
Pipeline inventory
Anticipation or precautionary stocks
MEETING CHANGING DEMAND WITH FLAT CAPACITY
DEMAND STOCK BUILD SUPPLIER CAPACITY
PULL FORWARD
M11:U1:1.3-1
Inventory
Input process
Inventory
Loss of sales from delay in supply Loss of goodwill and delayed payment from customers if orders are not delivered in full Higher transportation costs to fill rush orders Disruption of the production process Inefficient production scheduling Purchasing of small volume supplies at high prices to meet shortages Quality or specification differences due to the need to call upon other sources
requisitions that are satisfied on time and in full (OTIF)
ITC
M11:U1:1.5-1
The cost of money tied up in stock Fixed storage costs Variable storage costs
M11:U1:1.6-1
Variety
A
ITC
B
M11:U1:1.7-1
ITC
M11:U1:1.8-1
Inventory Manager
External relations with supply chain partners Objectives of inventory management
Unit 1
Inventory planning
Unit 3
Unit 4
Workforce Training
Short term operational
ITC
Time Horizon
Records should reflect what is actually in inventory The types of inventory transactions Improving the timeliness of inventory transactions Where materials can be found:
Goods reception areas Inspection areas Reject material space for damaged inventory Warehouse shelf space (storage areas) Kitting or order compilation spaces Workbench bins & around machines Work-in-progress holding areas Assembly lines
$150
200
100
ITC
No. of units in stock and unit value 140 units at $150 each
M11:U2:2.3-1
$150
200
100
Issues are valued based on the cost of the latest arrivals No. of units issued
Total value of and unit value units issued 100 units at $150 each $15,000
The value of stock is calculated from the No. of units in stock Total value of unit values of the items remaining in stock and unit value units in stock
ITC
M11:U2:2.3-2
$150
200
100
The value of stock is calculated from weighting the average values of the items in stock
Before issue:
No. of units in stock Total value of and unit value units in stock 40 units at $100 each $4,000 200 units at $150 each $30,000 Weighted average unit value $34,000 = $34,000 / 240 units = $141.67
Issues are valued based on the cost of this weighted average value No. of units issued Total value of and unit value units issued 100 units at $141.67 $14,167
After issue:
No. of units in stock Total value of and unit value units in stock 140 units at $141.67 $19,834
ITC
M11:U2:2.3-3
Rs150
200
100
No. of units in stock Total value of and standard value units in stock 140 units at rs130 each Rs18,200
No. of units issued Total value of and standard value units issued 100 units at Rs130 each Rs13,000
The inventory value will affect the companys profit & loss account
Turnover (sales): Cost of sales:
$10,000
If prices are rising or falling over time, each method will calculate the values of inventory issued and in store differently
Opening inventory
+
-
Net purchased
Closing inventory
Rs2,000
Rs6,000
(Rs6,000) Rs4,000
Operating profit:
You should verify that the same valuation method has been employed before comparing unit costs or inventory values
ITC
M11:U2:2.3-5
Action Point
2.3-1
$80
600
$120
200
Inventory valuation method 1. 2. 3. 4. 5. First in First out (FIFO) Last in First out (LIFO) Weighted Average Costing (WAC) Standard Costing ($100) Replacement Costing ($110)
ITC
M11:U2:2.3-6
Receipt of stock
Notification of goods receipt Storage/ put away Receipt of copy of purchase order
Inspection
Acknowledgement
Unloading Delivery
ITC
Schedule/plan delivery
M11:U2:2.4-1
Issue of stock
j ljdj ljk d jkds jj ljkd sljsd dljkdljd s djk ljdjj ljk sljsd ljk d jkds l d djk sljs
Cost allocation
350
14,
Delivery/ collection
Requisition authorised
Presented to stores
AZ-053.28
M11:U2:2.4-3
Very small or non-existent inbound inventory stores Requires smooth production process, short lead-times
supplier-guaranteed quality
ITC
M11:U2:2.5-1
Time interval = Q/D Time t Instantaneous deliveries at a rate of D/Q per period
ITC
M11:U2:2.6-3
ROL = (R d x L) + S
Where...
x Lead-time (L)
ITC
(e.g., in weeks)
M11:U2:2.5-2
Quantity
Re-order level
Re-order
Re-order
Re-order
Safety stock
Lead-time Time
ITC
M11:U2:2.5-3
Action Point
2.5-1
Re-order level
Given the following data, what is the re-order level:
ITC
M11:U2:2.5-4
A
Lead-time
C
Lead-time
D
Lead-time
Safety stock
{
Z
Fixed review interval Lead-time Time
ITC
M11:U2:2.5-5
Order size =
(Demand over the review interval
the lead-time)
(Actual stock)
(Pipeline stock)
stock)
+(Safety
In a periodic review system, the basis for determining the order size (which varies each time) is therefore the (fixed) review interval.
ITC
M11:U2:2.5-6
Action Point
Re-order quantity
Given the following data, what quantity should be re-ordered? Expected demand per week = 100 Lead time = 3 weeks Review interval = 4 weeks Safety stock = 300 Physical stock = 450 On order (pipeline) = 200 ORDER QUANTITY =
2.5-2
Periodic reviews
Lead-time Lead-time
Lead-time
{
Review interval Lead-time
M11:U2:2.5-7
ITC
ITC
3. Then, for each order, determine the specific order quantity, based on your desired levels of maximum & safety stock
M11:U2:2.6-2
Cost of placing the order Price discount costs Stock-out costs Working capital costs of inventory Storage costs Obsolescence costs Production inefficiency costs
ITC
M11:U2:2.6-1
Ordering costs
0.1 yr
= Unit purchase costs (i.e., price plus transport and other delivery costs) = Inventory carrying cost (expressed as a percentage of = Average inventory (the order quantity divided by 2)
M11:U2:2.6-5
i
Q/2
ITC
P)
Ordering costs
Co D/Q
= Cost per order = The number of orders in the period (i.e., the demand divided by the order quantity)
M11:U2:2.6-6
ITC
So...
Total cost =
Pi Q + Co D 2 Q
(Q)
50 100 150 200 250 300 350 400
Pi Q/2
25 50 75 100 125 150 175 200
Ordering costs
Co D/Q
400 200 134 100 80 66 58 50
Total costs
425 250 209 200* 205 216 233 250
M11:U2:2.6-7
Cost ($)
300
Total cost
200
400
Order quantity
EOQ =
ITC
2 Co D
Pi
Co = Cost per order D = Demand over the period P = Purchase cost per unit i = Inventory carrying cost
M11:U2:2.6-8
Action Point
2.6-1
ITC
M11:U2:2.6-10
M
Slope = Rd
Extreme case: Just-in-time deliveries, where Rs = Rd and no inventory accumulates
Rs - Rd
Q/Rs
Rd Q = = =
Time
The rate of demand (e.g., in units per week) The order quantity The rate of supply under the order (e.g., in units per week) The period over which each order is delivered
Rs
Q/R s = Rs - R d = M
ITC
The rate at which inventory build-up takes place while supplies are being delivered The maximum level of inventory reached
M11:U2:2.6-13
As before...
Co = Cost per order D = Demand over the period P = Purchase cost per unit i = Inventory carrying cost
ITC
M11:U2:2.6-14
Action Point
2.6-3
ITC
M11:U2:2.6-15
Action Point
2.6-3 (Contd)
Compare the yearly inventory holding costs in both cases. How much will be saved per year under this new arrangement?
Compare the yearly ordering costs in both cases. How much will be saved per year under this new arrangement?
ITC
M11:U2:2.6-16
Composite lead-time
Buyers internal lead-time Suppliers lead-time Logistics delivery lead-time
Long leadtimes
Lead-time can be managed - a crucial, but often neglected aspect of inventory control Direct and frank communications with supplier/customer production managers Resource planning systems integrated throughout the supply chain across a communications network like the Internet Not reactive, but Proactive lead-time monitoring & reduction techniques
M11:U3:3.2-1
?
ITC
ORDERS GOODS
FACTORY
2. Orders from retailers to 3. Orders from distributors distributors to 4. Orders factory from factory 1. Increase of 10% warehouse warehouse to in orders from factory consumers to retailers
ORDERS
TIME
ITC
M11:U3:3.2-2
TIME
ITC
M11:U3:3.2-3
ITC
M11:U3:3.2-10
Delivery schedule
Stages
1
Order fabric
3 2 4
Cut & stitch
Lead-time = 3 wks
Receive fabric
Dispatch
1 wk
Suits delivered
ITC
M11:U3:3.2-11
Stages
1
400 0 300 0 0 0 200 1000 900 800 700 600 500 400 300 200 100 0
ITC
3 2
400 0 300 0
Lead-time = 3 wks
4
400 0 300
1 wk
5
400 0
1 wk
6
400
LOB
900 700
M11:U3:3.2-12
A powerful tool for maximising order service levels and for optimising safety stocks and normal inventory levels is essential to prioritise management time, disaster recovery plans and calculate insurance cover requirements
ITC
M11:U4:4.3-1
The technique enables individual minimum/maximum levels of inventory to be easily determined by classifying inventory into three categories
ITC
M11:U4:4.3-2
175
1 15
$ 2
$ 10 $ 2
$ 350
$ 10 $ 30
ITC
M11:U4:4.3-3
Item No. 4 3 6 5 1 2
Cumulative Percentage percentage Total Cumulative of total ABC value Usage of total usage classification usage ranking Value value value 1 2 3 4 5 6 $ 350 $ 450 $ 480 $ 490 $ 497.5 $ 500 70 % 20 % 6% 2% 1.5 % 0.5 % 70 % 90 % 96 % 98 % 99.5 % 100 % A B C C C C
ITC
M11:U4:4.3-4
80%
Vilfredo Pareto
20%
ITC
100%
M11:U4:4.3-5
Class parts are the significant few 6070% of your companies total purchasing spend but only around 10-15% of the total number of items in stock. Critical items that need tight control
Valuable Class A parts are reviewed frequently because inventory cover is low due to their high individual part value
ITC
M11:U4:4.3-6
C Class
parts are the trivial many 10-15% of your companies total purchasing spend but more than 60-70% of the total number of items in stock. Higher volume deliveries reduce administrative costs. Often stock control is limited to bin systems.
M11:U4:4.3-7
ITC
A C
B Class
parts fall between A and C class parts in terms of both inventory levels and effort/systems used to manage the parts. They usually range from 20-30% of both expenditure and the number of items in stock.
M11:U4:4.3-8
ITC
Action Point
A-B-C Analysis
Item No. 1 2 3 4 5 6 7 8 9 10 11 12 13
ITC
4.3-1
Action Point
as class A, B or C.
4.3-1 (Contd)
A-B-C Analysis Now rank these items and complete the table, classifying them
Cumulative Percentage percentage Cumulative of total ABC Usage of total usage classification usage Value value value
Item No.
ITC
M11:U4:4.3-10
A-B-C revision
For A class parts we maintain high service levels by allocating more effort and better systems, rather than high inventory levels
ITC
M11:U4:4.3-11
A-B-C revision
ITC
M11:U4:4.3-12
Class A B C
ITC
M11:U4:4.3-13